Another Call For Euro to US Dollar to End the Year Higher

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The Euro to US Dollar’s break above the psychologically significant 1.10 level has led to a slew of forecast upgrades for the pair.

ING recently upgraded their outlook for the pair but now yet another major bank ABN Amro has also revised up its forecasts too.

ABN Amro’s view hinges on the European Central Bank (ECB) winding up their QE program and raising interest rates sooner than had previously been expected.

A recent substantial improvement in economic data from the Eurozone has led commentators to speculate that the ECB will now ‘normalise’ its policy by unwinding – or tapering as it is called – its emergency QE program and to start raising interest rates.

The need to consider ‘normalising’ policy was recently voiced by both ECB’s permanent member Beniot Coeure and central bank officials from Germany.

ABN Amro’s Georgette Boele now feels this will act as the catalyst for a rise in the Euro.

But the forecast upgrade to EUR/USD is also based on a simultaneous weakening of the Dollar.

Dollar Bears..

The Dollar’s reign as king currency, which began not long before the start of the US presidential election and gained momentum after Donald Trump’s victory is nearing an end, according to ABN Amro.

Growth expectations have been overexaggerated and the market has already mostly priced in the two interest rate rises that are expected this year – the 25 basis point rise in June and the 25 bps rise in September.

“We expect more dollar weakness and euro strength this year for the following reasons. First, a 25bp Fed rate hike in June is fully discounted and a 25bp rate hike in September is for around 50% priced in. So while we expect two further rate hikes this year, it is unlikely that this will provide strong support for the US dollar,” said Boele.

There are other reasons she expects a rise, the chief being a deterioration of economic data:

“We remain bearish on the US dollar across the board for 2018. This is because we expect the US growth/inflation mix to deteriorate and US real yields to move lower.”

Speculative futures positions in the Dollar have also been falling steadily as sentiment has soured for its prospects.

“According to the recent data of the commitment of traders report (up to 9 May 2017), speculative net-long positions in the dollar have been cut in half. If investors were to become more negative on the dollar because of the political developments and US data would not surprise substantially to the upside, these positions will likely be cut towards neutral. This could mean another 4% decline in the dollar versus a basket of currencies,” said Boele.

Technically the picture has also deteriorated after the Dollar Index fell below its 200-day moving average – and EUR/USD moved above its.

“The US dollar index has broken below the 200-day moving average and EUR/USD above this technical level. This means that speculative investors will look for opportunities to sell the dollar and buy the euro,” add ABN Amro.

Arguments Against..

Their counter-argument is that although data out of Europe has improved they do not see the improvement as material enough to encourage the ECB to accelerate their plans to normalise monetary policy.

And even if they do begin to normalise, they see the Euro’s response as likely to be limited.

“While we welcome recent outperformance of European data (we have been EUR bulls since late March – link), we think the scope for additional EUR upside from policy expectations alone might be limited from current levels.”

Another argument against Dollar weakness is that volatility has reached record low levels not seen since 2014.

The expectation is that soon there will be a sudden rise in volatility and rising volatility is usually associated with a pick-up in the Dollar.

Forecasts

As far as the forecasts go, ABN Amro have increased their 3-month forecast to 1.12 from 1.05.

6 months out and they see EUR/USD at 1.15 from 1.05 previously.

They see it at 1.15 at the end of 2017.

They then see it rising to 1.18 during the first half of 2018 and ending the year at 1.2000, which is their final forecast.

The Euro-to-Dollar rate rose Thursday as traders responded to a "dovish" set of Federal Reserve meeting minutes by dumping the US Dollar but the path ahead for the exchange rate is now increasingly muddied by the mounting prospect of a renewed protectionist bent in White House trade policy.

The Euro likely bottomed out at a six-month low this week, according to strategists at CIBC Capital Markets, who argue the exchange rate now offers "good value" to speculators who are brave enough to bet on a recovery by the single currency.